by Brandon Smith from Alt-Market
Recently I was asked to give a presentation on the current state of the global economy to a local group of concerned citizens here in Northwest Montana. I was happy to oblige but when composing my bullet points I realized that, in truth, there were no legitimate economic numbers to examine anymore. You see, financial analysts have traditionally used multiple indicators of employment, profit, savings, credit, supply, and demand in their efforts to divine the often obscured facts of our financial system. The problem is, nearly every index we used in the past, every measure of capital flow and industry, is absolutely useless today.
We now live in an entirely fabricated fiscal environment. Every aspect of it is filtered, muddled, molded, and manipulated before our eyes ever get to study the stats. The metaphor may be overused, but our economic system has become an absolute “matrix”. All that we see and hear has been homogenized and all truth has been sterilized away. There is nothing to investigate anymore. It is like awaking in the middle of a vast and hallucinatory live action theater production, complete with performers, props, and sound effects, all designed to confuse us and do us harm. In the end, trying to make sense of the illusion is a waste of time. All we can do is look for the exits…
There is some tangible reality out there, but it is difficult to find, and there are few if any mainstream numbers to verify. One has to remember always that the fundamental world of money and trade revolves around real people and real circumstances. No matter how corrupt our economic system is, as long as there are human beings, there will always be supply and demand that cannot be hidden. We have to look past the “official numbers” and look at the roots of trade. Where has demand fallen? Where has supply diminished? Where are the tangible goods and needs and how have they changed?
Let’s first start with the mainstream version of our system, looking at each aspect of the economy that no longer represents the truth of our situation…
Employment, Savings, And Debt
Much of this information is old news to those of us in the Liberty Movement, who tracked the progress of the global collapse long before the general public even knew of its existence. However, it is useful to take a step back and look at the basic picture every once in a while.
According to numbers issued by the Department of Labor, weekly unemployment reports have dropped to a five year low, and the overall employment rate is holding at 7.9%. This would seem to be a vast improvement over the dreadful bloodletting in the system only a few years ago. Has the private Federal Reserve and the Obama Administration really done it? Have they turned back the tide on the greatest fiscal crisis the U.S. has seen since the Depression?
No. They haven’t.
They have only changed how the data is disseminated to the public. In order to understand how the employment statistics con is being engineered, it is important to understand the difference between “Adjusted” and “Unadjusted” numbers.
Labor Department data is “seasonally adjusted”, using a series of statistical assumptions including something called “Trend Cycle Analysis”. Trend Cycle Analysis is, basically, a sham, but a sham put together in a very complex and confusing manner. If you ask a mainstream economist what it is, you’ll likely get a three hour long dissertation filled with financial babble and very little concrete explanation. So let me break it down as simply as I can…
Imagine that you are going to estimate how much profit you plan to make in a particular month, but you don’t just consider your current pay rate and pop it into a calculator; you also throw in the possibility of a few pay raises, an inheritance from a grandma who might kick the bucket, and, your exaggerated expectations of the entire year’s profit on top of that. You may also take into account future bad weather, a mugging, a nuclear war….whatever. All hypothetical situations not based in reality. Basically, you decide that a particular trend in your income is inevitable, then, mold your statistical analysis around that assumption.
When your real profit numbers come in (the unadjusted numbers) and they do not meet your expectations, you simply change them according to what you believe SHOULD have happened. If you insist that your profits are going to go up for the year, and they go down for a couple months instead, you change the variables you use to calculate the statistical average so that the results match your expectations, assuming that it will all balance out in the end.
Now, this sounds utterly insane for the common person out there trying to make a living. If you ran your household this way, without accepting the cold hard unadjusted numbers in front of you, you’d find yourself broke and on the street in no time. Unfortunately this is EXACTLY how our government handles most financial data; by coming to a final conclusion before hand, and then forcing the numbers to fit that conclusion.
This is why in February of 2013, “adjusted” first week unemployment rate was reported at 366,000 – a 5000 person drop from the week before. A seeming improvement in the trend. But, unadjusted numbers came in at 386,176 – a 16,000 person spike from the week before. When one examines real unemployment numbers, he finds that the divergence between the adjusted and unadjusted statistics is growing larger with each passing quarter. That is to say, the contradiction is becoming so blatant between the hard numbers and the Labor Department’s fantasy numbers that one must question whether or not the government is lying to us outright about the state of the economy (hint – they are lying).
These same methods are used by the government to calculate progress in the housing market, disposable income, etc.
The claim of “recovery” in the jobs market simply doesn’t jive with other indicators, like 2012 Christmas retail, which had the worst showing since the crash in 2008 (and these are still mainstream numbers!):
Average household savings continue to scrape the bottom of the barrel, indicating that the public is not spending or withholding cash. They are simply broke:
And the overall GDP of the U.S. contracted in the fourth quarter of 2012 for the first time in three years (again, according to official numbers, meaning the reality is much worse):
The downturn in consumption and industry also seems to be supported by the Baltic Dry Index, a measure of global shipping and rates. The BDI has fallen to near historic lows THREE TIMES in the past year, which to my knowledge, has never happened before. In the past, the BDI has been a strong prophetic indicator of future market volatility. Usually, around a year after a severe decline in the index, a dangerous economic event takes place. The BDI made its first sharp drop to all time lows at the end of January 2012, exactly a year ago.
U.S. household debt was recently reported to have fallen to a 29 year low, but the ratio used by the Federal Reserve applies a statistic for disposable income that is derived from the Trend Cycle boondoggle method. While markets cheer, the truth is, the only reason household debt obligations have fallen at all is because bank lending and credit issuance remains frozen. Consumer debt falls when there is no money to borrow. In fact, the Federal Reserve actually pays large banks NOT to lend to the public; an activity which was exposed by Dennis Kucinich in 2009 on the House Committee on Oversight and Government Reform. An activity that continued through 2012:
Keep in mind, one of the primary arguments the Federal Reserve used when promoting the bailout concept was that it would “free up credit markets” so that lending could pick up again and fuel a recovery, and yet, at the same time, they were paying banks to NOT lend.
Meanwhile, the supposed job recovery has produced an astonishing increase in welfare recipients in the U.S., including a record 46 million Americans on foodstamps (approximately 15% of our population):
If we are to apply any “trend” to our calculations on overall economic health, then we should include the extreme level of government handouts, and poverty levels which are now at all time highs. The facts are undeniable; the number of people who have much less than they did in 2008 has grown. How then could the U.S. be considered “in recovery”?
National Debt And The Fiat Lie
With the Dow Index hovering near highs of 14,000 our system truly looks to be on a rocket ship to pre-2008 money market bliss. In a mere five years we have returned to equity spikes that stagger the mind and the wallet. At least, that’s how it all appears…
What needs to be taken into account, though, is the amount of fiat money being created by the Federal Reserve, and how much of that printed pixie dust currency is fueling our magical flight to Neverland. Since 2008, our official national debt has increased from $10 trillion to $16.4 trillion, and some estimate $17 trillion to $18 trillion by the end of 2013 (unless, of course, a collapse occurs). Which means our national debt, which took decades to reach the $10 trillion mark, will have nearly doubled in only six years!
So, what has a doubling of our national debt in such a short span of time bought us? Well, credit markets remain frozen, property markets remain stagnant, poverty is at historic levels, welfare recipients are at epic highs, and consumer activity and GDP is back at 2008 lows. Where did all that printed money go? Where was it spent? To answer that question, we only need to find what area of the economy has seen the most positive (or fantastical) activity. What sector is seeing a massive boost while the rest tumbles?
I suggest that a large portion of QE1 through QE3 has gone to prop up the stock market, and nothing else. I suggest that American taxpayers are fronting the bill for the equities bonanza we see today. I suggest that the Dow is being used as a Red Herring to distract the populous for as long as possible while real assets are being snapped up and hoarded by international banks and foreign entities. I suggest that we are being leached dry and that the parasites are almost ready to move on…
When will it all end? Perhaps sooner than many people think. The decision by D.C. to delay talks on the so-called “Fiscal Cliff” until March may not be coincidence. Extensive cuts in federal spending are absolutely necessary and cannot be dismissed forever, but, because the last vestiges of our system that still operate do so through government money, such cuts will cause immediate damage to the economy, including possible default and dollar devaluation. Refusal to make cuts will result in credit downgrades, currency inflation, and a loss of the greenback’s world reserve status. There is no “right” way out of this quandary.
When this collapse is initiated, it would certainly behoove all parties involved, including central banks, international banks, and criminal politicians, to have a scapegoat handy for the citizenry to direct their rage at.
Event Horizon Economics
An “Event Horizon” in physics is a moment or singularity in spacetime at which a gravitational pull becomes so great that there is no way to escape it. It is a point of no return. I believe America’s economy has reached its own Event Horizon. Our system is now entirely fiat driven, with very little or no true economy left. Without constant injections from the Fed, and perpetually low interest rates, the country would implode tomorrow. This is not recovery. Actually, I’m not sure what to call it.
Today, independent economic analysts cannot look to the numbers to determine future trends. Most are fake, and the rest are ugly, and I’m not sure much else can be said in their regard. Instead, we must now look to events, rather than statistics, because our country has been maneuvered into a position of utmost frailty. Like an avalanche shelf waiting for that perfectly timed disturbance to trigger its roaring collapse. All that is needed is a macro-crisis, and it is no great feat for such a thing to be created in our tension filled global environment.
War in Syria and Iran leading to a tripling of energy prices. Sanctions and strife with North Korea leading to Chinese economic retribution. Conflict between China and Japan, again leading to Chinese economic warfare and perhaps real warfare. An opportune “cyber attack” which could be used as an excuse for a market crash and even an internet shutdown. A “political impasse” between Reps and Dems which leads to a default of U.S. credit. Any one of these catastrophes could easily occur (with a little nudge from some well placed people) and feed a wider global tragedy. The important thing to remember is that while this event will be blamed for the breakdown, it was international banks, the Federal Reserve, and elements of our own government that made the domino effect possible. They put the pieces in place. The act that knocks them over is secondary.
I have spent the past seven years writing about “potential” threats to our overall system, but these dangers were always just beyond our sight. Just around the corner. Today, it is as if the journey is over, and all those threats have materialized right before my eyes as real, and imminent. I am watching that which I warned of come to fruition, and this is certainly not a pleasant thing. What is valuable, though, is what we have all done in the Liberty Movement with the time that we had. From when I began writing for the movement until now, I have seen an overwhelming increase in public awareness. It may not be obvious to newer activists, but it is there all the same. While we still face disparaging odds, and millions upon millions of oblivious bystanders, there is, amidst these darker moments, a steadfast community of free men and women forming. I have full faith in the future. Much more so than I ever did before. Our economy may be detached from reality, but our endeavors as individuals will not be. Our resolve will be the great game changer. Not fiscal calamity.
- ECONOMIC COLLAPSE: The U.S. Economy Is Now Dangerously Detached From Reality (secretsofthefed.com)
- The U.S. Economy Is Now Dangerously Detached From Reality (thedailysheeple.com)
- John Williams: How To Survive The Illusion Of Recovery (etfdailynews.com)
- Obama: Jobs Destroyer (veteranstoday.com)
- Shocking numbers show media lying to you about unemployment (talesfromthelou.wordpress.com)
Obama’s emphasis on saving government workers hurts American business
By now, just about everyone has had an opportunity to pick apart President Obama’s fatuous remarks about how the private sector is “doing fine,” while public employees are suffering. The president’s comments, of course, were not even within viewing distance of reality. After all, despite some recent hiring, the private sector is still 4.5 million jobs below its 2008 employment peak. And while public employment is also down from 2008, that ignores a boom in state and local government hiring from 2006 to 2008. The current decline still leaves state and local employment about where it was in 2006. Meanwhile, federal employment is up 88,000 jobs.
But a much bigger question is: Why is the private sector doing so poorly? Perhaps because most businessmen are not that dumb.
If one includes the unfunded liabilities of Social Security and Medicare, this country’s real total indebtedness could run as high as $129 trillion (in current present value). Even under the most optimistic scenarios, our real debt exceeds $92 trillion. Measured as a percentage of GDP, our total debt exceeds the total debt of Greece or Spain. By comparison, the total book value of all U.S. companies is roughly $23 trillion. It’s not a perfect comparison (future taxes will be paid out of future wealth), but it does put things in perspective. Any business owner looking down the road, and seeing debt four to five times the size of his or her company, is likely to decide that this is not a great time to expand or hire new workers.
That is why the president’s preferred solution of offsetting private-sector losses with increased public-sector hiring is so mistaken. Those new public-sector jobs must be paid for with more debt and taxes borne by the private sector. As Frédéric Bastiat wrote in 1848, public employment “gives jobs to certain workers. That is what is seen. But it deprives certain other laborers of employment. That is what is not seen.” Bastiat concluded that trying to increase employment through government was “a ruinous hoax, an impossibility, a contradiction.”
For example, a study done for the European Commission by economists at the University of Paris looked at public employment in 17 countries between 1960 and 2000. It found that for every public-sector job created, 1.5 private-sector jobs were destroyed. Thus, hiring more government workers actually increases the level of unemployment.
And, perhaps more directly relevant, a study of President Obama’s stimulus bill by Timothy Conley of the University of Western Ontario and Bill Dupor of Ohio State concluded that, while the stimulus created or saved some 450,000 government jobs, it destroyed or prevented the creation of more than twice as many private-sector jobs.
Of course, in general, we know that an increase in the size of government slows economic growth. As Harvard’s Robert Barro points out, there is a “significantly negative relation between the growth of real GDP and the growth of the government share of GDP.” Under President Obama the federal government consumes 24 percent of GDP, a one-third increase over the historic post–World War II average of 19.8 percent. Throw in state and local government spending, and government spending now amounts to 36 percent of GDP.
President Obama is correct that much of this spending binge began under President Bush, but Obama’s policies have taken the Bush spending (including one-time spending hikes such as TARP) and turned them into the new baseline for future spending. And the president would have spent even more if he could have gotten away with. The purpose of last week’s press conference, after all, was to renew his call for more spending.
The president says “more spending,” and businesses correctly hear “more debt” and “higher taxes.”
This long-term burden on American business comes on top of short-term uncertainty. In January 2013, the Bush tax cuts will expire, leading to the largest tax hike in U.S. history unless Congress can reach an agreement. If reelected, President Obama seems determined to use this potential “fiscal cliff” to push for higher taxes on the wealthy, businesses, and investors. The president’s insistence, in particular, on raising capital-gains taxes will discourage business investment and expansion, while the hike in federal income taxes will fall especially hard on small businesses and Subchapter S corporations, which often file taxes as individuals.
Also ahead, pending a decision from the Supreme Court, is the potential implementation of Obamacare. Most of the law’s tax hikes, $569 billion over the first ten years, fall on businesses. Next year, for example, there would be new taxes on medical devices and investment income, among others.
And in 2014, the law will impose a mandate on employers with 50 or more workers to provide their workers with health insurance, at a cost of $4,450 on average, or else pay a $2,000-per-employee fine. As former Labor Department economist Diana Furchtgott-Roth explains:
The $2,000 per worker penalty raises significantly the cost of employing full-time workers, especially low-skill workers, because the penalty is a higher proportion of their compensation than for high-skill workers, and employers cannot take the penalty out of employee compensation packages. Suppose that a firm with 49 employees does not provide health benefits. Hiring one more worker will trigger a penalty of $2,000 per worker multiplied by the entire workforce, after subtracting the statutory exemption for the first 30 workers. In this case the tax would be $40,000, or $2,000 times 20 (50 minus 30).
If you were that small-business owner with 49 employees, how fast would you run out to hire that 50th worker? In fact, a Gallup survey of small businesses found that nearly half (48 percent) cited Obamacare as a reason why they are not hiring. It’s worth noting that in France, another country where numerous government regulations kick in at 50 workers, there are 1,500 companies with 48 employees and 1,600 with 49 employees, but just 660 with 50 and only 500 with 51.
And, if Obamacare is not enough of a burden on business, 2013 will also see the onset of many of the new Dodd-Frank regulations on banking, lending, and finance.
President Obama seems wedded to an old-fashioned Keynesian philosophy of trying to revive the economy by using government hiring and spending to increase consumer demand. By now we should have learned that no amount of pump-priming is going to help, as long as businesses are worried about the crushing burden of debt, taxes, and regulation in their future.
That’s the real truth behind President Obama’s gaffe: He’s not just out of touch; he’s wrong.
— Michael Tanner is a senior fellow at the Cato Institute and the author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.
- Has President Obama’s Stimulus Made the Private Sector Lazy and Hurt Job Growth? (txwclp.org)
- The Private Sector is Not ‘Doing Fine’ (hawaiireporter.com)
- David Axelrod Got It All Wrong: How He, The President, And All Progressives Need To Address Obama’s Economic Record (crooksandliars.com)
- Morning Bell: The Private Sector is Not “Doing Fine” (heritage.org)
March 8, 2012
I had dinner the other night with a bank executive in charge of government finance who told me that the aggregate spend of all the infrastructure projects in Panama totals more than $13 billion. This is roughly 50% of the entire Panamanian economy.
The equivalent in the United States would be the government announcing a ‘Rebuild America’ infrastructure spending initiative in the range of $8 TRILLION! No doubt, it’s a lot of money for this small country.
Panama (and particularly Panama City) has been in a seemingly perpetual state of construction for nearly 10-years. The long boom in residential construction created an impressive skyline of condo towers along the new Cinta Costera. But residential demand peaked and petered several years ago.
In an effort to keep the party going, the government has essentially swapped a residential construction boom for an infrastructure boom.
There are so many projects here, you’d think you were in Chonqing, China. And it’s made life miserable for anyone who has to get into an automobile– Panama City’s already dismal traffic has now become utterly hopeless.
The real issue is that Panama’s debt has been steadily rising to finance several projects. In many cases, the debt increase has outpaced the country’s dizzying GDP growth. For example, Panama’s debt rose 10.3% in 2010, while GDP only increased 7.5%.
According to some of my local attorneys who work on the deals, many of these infrastructure projects are now being creatively financed: selling bonds of off-the-books quasi-government entities that own securitized future cash flows.
It’s all an elaborate process to keep the debt from hitting the government balance sheet and obfuscating Panama’s true fiscal status. Official debt is now hovering near 50% of GDP, but the actual figure is much higher.
It’s possible that some of these projects will prove to be good investments– it’s not the same as Chinese ghost cities down here, Panama has legitimate infrastructure needs and is building accordingly.
What remains to be seen, though, is what happens after the infrastructure projects are complete in, say, another 5-years. The hope is that the real economy will have grown enough to absorb the loss of infrastructure spending. This supposition is not out of the question… but it’s definitely not guaranteed.
For now, nobody seems to mind. People are working, they’re making money, the country is improving… and except for the obvious and ridiculously high inflation rate, life is good.
To be clear, Panama is definitely a good news story. It has had one of the most resilient economies in Latin America over the past few years, and perhaps more than anywhere else in Central America, Panama has a very clear (and growing) middle class.
When you go out at night, you see Panamanians out on the town spending their discretionary income… and I mean regular Panamanians, not just the Porsche-driving 20-year olds who inherited papi’s business.
A strong middle class with disposable income is important in any healthy economy, and its emergence marks the transition from ‘developing’ to ‘developed’ nation. Panama still has a -long- way to go, but it’s moving in the right direction.
When I think back to how this place used to be 10-years ago (and all the years in between that I spent here) versus today, the positive change is overwhelming. When I think about how places like the US and Europe used to be 10-years ago, the change is resoundingly negative.
It’s this trend, by far, that’s most important.
Read more posts on Sovereign Man »
Here are some good macro thoughts that put the oil threat into perspective (via Credit Suisse):
“The impact on GDP: each 10% rise in the oil price takes 0.2% off US GDP growth and 0.1% off global growth. This time the negative impact of a high oil price on growth is limited as: oil is only 10% above its 6-month MA (changes matter more than levels for growth); other energy prices are muted (coal prices are at 12-month lows, US gas prices down 40% yoy) and CPI food price inflation should fall by 5pp from here (adding 0.7% to disposable income); critically, unlike 2008 and 2011, neither the ECB nor GEM central banks are likely to raise rates in response to higher energy costs; and US macro momentum is currently consistent with GDP 0.8% above 2012 consensus, suggesting some buffer before consensus estimates get downgraded.
Impact on equities: since 2007, equities have tended to fall when oil prices rise by 40% yoy (i.e. an oil price of c$150/bbl). From a macro perspective, we would start worrying if the rise in the oil price pushed up US CPI above 4% (that is when equities de-rate, c$160/bbl), US GDP started being revised down (c$150/bbl) or European inflation rose above 2% year-end (c$140/bbl). Another warning signal is when inflation expectations decouple and start falling as oil continues to rise (as has happened in the past week). Each 10% rise in the oil price takes 2% off European EPS and c1% in the US, on our estimates (yet current valuations can accommodate a c10% fall in earnings).
From a regional perspective, we rank countries’ sensitivity to oil by looking at: net oil imports, energy’s weight in the CPI, output gap and the correlation with oil prices. The winners from a higher oil price are Norway, Russia and Canada, while Thailand, Turkey and Korea are negatively affected. We show cheap domestic plays in the ‘winners’ and expensive domestic plays in ‘loser’ countries.”
Source: Credit Suisse
- Credit Suisse Explains When You Should Start Worrying About Oil Prices (businessinsider.com)
- Oil Implications And Fed Policy (zerohedge.com)
- For A Quick-Read On U.S. Economy, Check Oil Prices (ibtimes.com)
- The Mystery Behind Rising Oil Prices Solved (zerohedge.com)
- Emerging Europe: Rising Oil Prices Risk Growth More Than Inflation (ibtimes.com)
- This Is Why Oil Prices Are Hurting Europe More Than The US (businessinsider.com)
- Here Are The Winners In An Oil Price Shock (zerohedge.com)